CRA updates rein in ‘overbroad’ mandatory disclosure regime

Much of the updated guidance, released Aug. 15, could be characterized as housekeeping, said Toronto tax lawyer David Rotfleisch: “This whole area is fraught with uncertainty, so the more clarity they can bring to it, the better off we all are.”

Bhuvana Rai, a lawyer with Mors & Tribute Tax Law, said the latest round of updates will reduce the disclosure burden on taxpayers. “Just about all of these changes are specifically in favour of taxpayers, because they’re discussing cases where they don’t think people should be reporting,” she said.

The mandatory disclosure rules came into effect in June 2023. The rules dramatically lowered the threshold for what the CRA considers an “avoidance transaction,” and created a reporting obligation for taxpayers and their advisors when one of the following hallmarks is present:

1. advisors or promoters are engaged on a contingent fee arrangement
2. advisors or promoters receive confidentiality protection regarding the transaction
3. contractual protection is provided to the taxpayer or other parties in the event a tax benefit is challenged or ultimately fails to materialize

The changes made earlier this month to the CRA’s administrative guidance deal largely with individual hallmark exclusions, including:

• Referral fees for life insurance in the context of estate freezes: an insurance or third-party advisor whose referral fee is based on the number of successful referrals will not trigger the contingent fee hallmark.
• Limitation of liability clauses: The previous guidance clarified that an accountant’s professional engagement letter containing such a clause would not, on its own, trigger the contractual protection reporting hallmark, as long as the clause was meant to generally limit the professional’s liability for negligence. The new version extends the exclusion to any professional.
• Tax indemnities in employment and severance agreements: Neither employer nor employee will generally have a reporting obligation, the guidance says. For employers, the contractual protection hallmark is not triggered since they do not receive any tax benefit from the indemnity. Employees are typically not protected by the indemnity, so once again the protection hallmark is not triggered.
• Trustee indemnity: The new CRA guidance says the standard clause protecting a trustee who acts in accordance with the trust’s terms will generally not meet the threshold for the contractual protection hallmark. However, the hallmark may still be triggered if “it would be reasonable to conclude that an aggressive tax avoidance transaction was contemplated at that time or entered into under the pretext of such a clause.”
• Insurance included as part of the acquisition of a business: The contractual protection hallmark will not be triggered solely by insurance or indemnity that’s “based on the actions or inactions of a person to achieve a tax result,” the guidance said.

“A lot of these things shouldn’t have been an issue. They’re making official what really should have been obvious,” Rotfleisch said, pointing specifically to the clarification on limitation of liability clauses. “It’s an absurdity that the exclusion should have applied only to accountants, but now it’s been fixed.”

Rai remains uneasy about the way the process has played out, noting that some problems now being dealt with could have been tackled before the legislation enacting the regime received royal assent in June 2023.

“Many of the issues that financial professionals raised was that the rules were overbroad,” Rai said. “The CRA asked for this, and they’re now dealing with the fact that they’ve required far too much.”

Ryan Minor, director of taxation with CPA Canada, said many of his members will be watching for further guidance from the CRA, noting that the maximum penalty for non-compliance stands at $110,000 plus the value of all fees charged.

Until recently, advisors also faced the threat of jail time under the Income Tax Act’s general failure-to-file penalty provision, which provides for a fine of up to $25,000 and a term of imprisonment up to a year for violators. However, the federal government’s 2024 budget eliminated reportable and notifiable transaction information returns from the general penalty provision.

“I think it’s a living document that they will continue to update from time to time,” Minor said, referring to the regime. “A lot of these updates are relieving. They assuage concerns in the profession that they may have a reporting obligation as a result of pretty innocuous of standard clauses in their agreements.”

The updated guidance also includes commentary on certain “notifiable transactions” that the federal government has previously identified as identical or substantially similar to potentially abusive ones.

For example, the guidance confirms that a company, its subsidiaries and advisors with unused tax attributes must make their own filings regrading transactions in which the taxpayer relies on “purpose tests” to avoid a deemed acquisition of control.

In addition, the guidance states taxpayers who take part in cash pooling as part of back-to-back lending transactions that are otherwise notifiable would generally not need to make a mandatory disclosure filing as long as they reasonably expect to remain solely a creditor.